Spin-Off Research In the News

Five Ways to Cash In on Corporate Spin-offs

Posted by Joe Cornell, CFA on Fri, Nov 14, 2014 @ 10:11 AM

Spin-Off, Joe Cornell

As companies look to unlock value by breaking up, investors have a variety of opportunities.

By David Milstead, November 7, 2014

The U.S. divorce rate has fallen over time, but many companies are calling it splitsville. Increasingly, U.S. companies are spinning off parts of their businesses and giving shareholders stock in these newly independent enterprises. Hewlett-Packard (HPQ) recently announced that it would break into two companies, and eBay (EBAY) said it would spin off its PayPal unit. Madison Square Garden Co. (MSG) says it’s considering jettisoning the New York Knicks and New York Rangers. Meanwhile, some investors are pressuring PepsiCo (PEP) to separate its snacks and soda businesses. In fact, 2014 is on pace for 62 corporate spin-offs, the most since 2000, says Joe Cornell, of Spin-Off Research.

Why so much breakup activity now? It’s all about lifting share prices in a lackluster economy, which makes it hard for companies to boost sales and profits. Investors are rewarding companies for separating their low-growth businesses from ones with better prospects for profit and revenue gains. Encouraging the trend are so-called activist investors, who often pressure firms to spin off parts that they think will garner higher stock market valuations. “Once upon a time, conglomerates were supposed to offer you what a portfolio of stocks in the market does,” says Nicholas Heymann, who has been covering industrial stocks on Wall Street for more than three decades. “They were supposedly able to leverage technology and managerial expertise. Today, that argument has increasingly been diminished.”

There are two ways to play the spin-off game: One is to try to identify spin-offs in advance of an announcement and benefit from the bump in the share price that often occurs. The other is to wait for the separation to take place, cool your heels for a while and then invest in the spin-off.

Guggenheim Spin-Off ETF (CSD) is an exchange-traded fund that has produced impressive returns taking the latter approach. The fund, which tracks an index of spin-offs, beat Standard & Poor’s 500-stock index every year from 2009 through 2013. Although it lagged the index by 11 percentage points in 2014, it returned a stellar 22.5% annualized over the past five years. (All prices and returns are as of November 6.) Manager William Belden says the index his fund tracks adds a spin-off only after the stock has traded for at least six months. The fund waits to buy because shareholders of the parent company often dump the stock of a spin-off after receiving it, pushing the price down and creating a possible bargain. Meanwhile, the managers of the now-independent concern, freed from the shackles of a larger company, can focus on making the spin-off more profitable.

Cornell likes Keysight Technologies (KEYS, $30), a recent spin-off from Agilent Technologies (A). Keysight sells measurement instruments to the electronics and communications industries. Cornell thinks the stock is worth 13% more than its current price. Wait to buy, though, because the gap between the share price and Keysight’s true value is likely to widen as some Agilent shareholders dump their Keysight shares.

Cornell also favors Knowles Corp. (KN, $19), which was spun off from Dover Corp. last March. Knowles makes microphones and speakers for mobile phones and tablets. Cornell believes that as Chinese phone makers improve the audio performance of their products, they’ll buy more components from Knowles. Cornell values Knowles at $27 per share.

Want to bet on a future breakup? Ken Squire operates 13D Monitor, a research firm that keeps tabs on activist investors and is named after the form activists must file with the Securities and Exchange Commission when they take a big stake in a company. He also manages The 13D Activist Fund (DDDAX), a mutual fund that beat the S&P 500 in 2012 and 2013, its first two full years of existence, and trails it by just one percentage point so far in 2014. Unfortunately, we can’t recommend the fund because of its 5.75% sales charge and high annual fees. (An institutional share class is no-load.)

At any rate, Squire says he “loves” Darden Restaurants (DRI, $53), the owner of Olive Garden and a stable of smaller, faster-growing chains. Squire says the stock still trades at the price at which hedge fund Starboard Value bought in, even though the hedge fund has effectively taken over the company. Starboard’s principals “want to separate the growth companies from the mature restaurants,” he says. “And it’s going to happen because the guys who want to do it just got control of the board.”

Squire also likes Babcock & Wilcox (BWC, $30), a maker of components for nuclear power plants that also owns a business that supplies equipment to coal plants. An activist firm called Blue Harbour Group wants B&W to unload the coal unit, which, Squire says, “has been weighing down the company’s entire valuation.”

View article on Kiplinger's: Five Ways to Cash In on Corporate Spin-offs


Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog entries are delayed.  Spin-Off Research subscriber-base receive the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.

Tags: Keysight Spin-Off, Knowles Spin-Off

Michigan companies part of national trend of spin-offs

Posted by Joe Cornell, CFA on Mon, Nov 10, 2014 @ 14:11 PM


It's possible that some of the corporate spin-offs announced by Comcast, Federal-Mogul, Gannett and Masco will benefit southeast Michigan. But spin-offs are not always successful.

Brent Snavely | Detroit Free Press | November 9, 2014


What do Comcast, eBay, Energizer, Federal-Mogul, Ferrari, Gannett, Hewlett-Packard, and Masco have in common?

They are all part of a national trend of corporate spin-offs that are driven by the belief their companies would be better off if two divisions split up and go off in separate directions.

Four companies that have announced spin-offs this year — Comcast, Federal-Mogul, Gannett and Masco — are either headquartered in southeast Michigan or have operations in Michigan. And exotic supercar brand Ferrari is part of Fiat Chrysler Automobiles.

In some cases, the spin-offs are likely to benefit the state, said David Sowerby, portfolio manager for the Bloomfield Hills office of Loomis Sayles.

"If a spinoff does what it is supposed to do, and it works, it's probably a good thing," for the local economy, Sowerby said.

Federal-Mogul, for example, plans to keep both companies it is creating in Southfield. Masco's contractor services business, however, is planning to locate its headquarters in Florida.

Biggest year since 2000

This year, Spin-off Research estimates that 61 U.S. companies will complete a spin-off, up from just 37 in 2013. That would make 2014 the busiest year for corporate spin-offs since 2000.















 An estimated 61 companies will complete corporate spin-offs in the U.S. this year.(Photo: Martha Thierry, Detroit Free Press)

Spin-offs are surging now because the U.S. economy has improved, stock markets had stabilized until a few weeks ago and a number of companies probably had put their plans on hold during the recession, said Joe Cornell, founder and publisher of Spin-Off Research.

Cornell also said activist investors, such as Carl Icahn, have increasingly pushed and prodded corporations to split apart. Icahn tried to break up Time Warner back in 2007 and who pushed eBay to sell PayPal this year. Icahn also has been a director of Federal-Mogul since 2010 and is largely behind Federal-Mogul's decision to split into two publicly traded companies.

Han Kim, a professor of finance at the University of Michigan's Ross School of Business, also said shareholder activists are a key force behind the corporate breakups.

"Shareholder activists are much more prominent these days," Kim said. "When shareholder activists first arrived years ago … people really looked at them with lots of suspicion. But I think now shareholder activists are much more accepted in American culture."

Shareholder activists also are behind the top reason that companies decided to split into two companies — the desire to "maximize shareholder value." That means companies conclude that the company would actually be worth more in the eyes of investors and bankers if its operations were broken apart.

The theory is two separate companies will be more focused on what they do and will perform better both financially and on the stock market.

The Beacon Spin-Off Index, which includes an evolving set of 40 companies born out of spin-offs, easily outperformed the S&P 500 and the Russell 2000 over the past five years.

"It's been kind of a tried and true way to generate value," Cornell said.

Good for Michigan?

The impact of spin-offs on the local economy and on employees is more difficult to measure. The creation of a new company means a new top management team must be assembled along with a new board of directors and often creates the need for new office space for the corporate headquarters.

"If it is successful, and the new company stays reasonably close to home, its probably going to be a catalyst for economic activity," Sowerby said.

Of course, spin-offs don't always work.

Both Visteon — Ford's former auto parts division — and Delphi — General Motors' former parts division — struggled for years before filing for Chapter 11 bankruptcy.

Delphi filed for bankruptcy in 2005 and spent four years selling off businesses and shifting its focus toward Europe, Asia and South America, finally emerging in 2009. Delphi also slashed pensions of about 21,000 workers during its bankruptcy. Visteon, with annual revenue of about $7.4 billion, is a shadow of the $20 billion in annual revenue it had when it was spun off from Ford in 2000.

Michigan-related spin-offs

But here is a quick look at spinoffs involving or impacting Michigan:

■ Comcast is spinning off its Midwest and Southeast operations so that its merger with Time Warner can overcome regulatory hurdles.

Comcast is creating a new company called GreatLand Connections that will be formed by St. Louis-based Charter Communications. Comcast has not said where GreatLand will be based.

■ Gannett, owner of the Detroit Free Press, plans to split its broadcast and digital business into one company and its newspapers into another company. No job cuts related to the spin-off have been announced or are planned for the Free Press.

■ Masco, which employs about 400 at its headquarters in Taylor, is cutting jobs there and plans to move the headquarters of its $1.4-billion installation and contractor services business to central Florida.

Masco will continue to manufacturer and sell Delta faucets and a host of other kitchen and bathroom brands and will remain in Taylor.

■ Federal-Mogul is splitting into two companies — Federal-Mogul Powertrain and Federal-Mogul Motorparts.

Both companies will be publicly traded operate out of a 10-story office complex at 27300 W. 11 Mile Road, in Southfield. Federal-Mogul moved to that building earlier this month.

Federal-Mogul Motorparts will sell brands such as Champion Spark Plugs and Anco wipers, and look to acquire other brands.

■ Ferrari has been a part of Fiat since 1969, when it first acquired a 50% stake in Ferrari and is now part of Fiat Chrysler Automobiles. On Wednesday, Fiat Chrysler CEO Sergio Marchionne announced plans to spin off Ferrari into a separate company next year and offer a 10% stake to new investors.

View article on Detriot Free Press: Michigan companies part of national trend of spin-offs


Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog entries are delayed.  Spin-Off Research subscriber-base receive the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.

Tags: Gannett Spin-Off, eBay Spin-Off, Comcast Spin-Off, Energizer Spin-Off, Federal-Mogul Spin-Off, Ferrari Spin-Off, Hewlett-Packard Spin-Off, Masco Spin-Off